Resignation rolls over investment firm

A weather bomb blew through Wall St last week, when Greg Smith, an executive director at Goldman Sachs, tendered his resignation. People resign from Wall Street firms every day without it creating the slightest ripple, but Greg Smith tendered his letter in the very public forum of the New York Times OpEd page.

While Goldman Sachs is, for now, still sailing along, Smith's commentary had the effect of a rogue wave, and its distant roiling hasn't ended yet. What Smith did was to describe the environment of the 143-year-old investment firm, the world's fifth largest, as toxic, more dedicated to self-enrichment than to the interests of its clients.

That opinion is not exactly news. Goldman Sachs had a significant hand in the near-fatal meltdown of the financial markets in 2007-08. Among other things, the firm allowed a hedge fund investor named John Paulson to handpick a bundle of poor (sub-prime) mortgages aka CDO's (collateralised debt obligations) which were sure to fail. These were further sold to unwitting investors. Paulson was then enabled to bet against the CDO's in the certainty of their failure, picking up US$3.7 billion in the process. While the SEC eventually filed civil fraud charges against Goldman, no one is going to jail and John Paulson is the 39th richest person on the Forbes list.

What Greg Smith achieved in his Times OpEd was to pull back the curtain on the vaunted wizardry of the firm whose members have gone on to sit in government as far and wide as Italy and Australia and the US Treasury Secretariat. Goldman Sachs and other firms like it rely upon the perception of their integrity.

Smith has deconstructed the culture of Goldman Sachs. That culture placed a value exclusively upon money and making of it by any means possible. According to Smith, Goldman sees clients as pigeons to be plucked rather than customers to be valued.

John Key made his fortune on the London currency trading desk of Merrill Lynch, not Goldman Sachs, but Merrill's culture was not that different. To the detriment of Merrill, which had a long and trusted name on Wall St, their culture shifted from the classic long-term greed of Adam Smith's laissez-faire capitalism to the "rip your eyeballs out" capitalism of short-term greed. To paraphrase Gordon Gecko of the movie Wall Street , greed may be good - if it's long-term, which allows for consideration of what is good for everyone, not just the dealer. When it's short-term greed, it's too tempting to forget the maintenance of trust in pursuit of a quick gain.

The present New Zealand government is pursuing just such short-term gains. It heard from the court on the sale of the Crafar farms that more than profit needed to be considered. The value to the country needs to be attended.

The prospective privatisation of four power companies is a prime example. The government is about to trade a known annual dividend of 28 per cent for a much lower rate of return on the quick sale of our assets - perhaps 5-6 per cent. Makes little sense long-term, but it looks good on the account ledgers. We need to ask: Cui bono (who benefits)?

We can look forward, if the course remains, to selling, drilling, and spilling. All for short-term gain. Little or none for long-term value. That is the mandate Mr Key claims. I wonder if everyone who voted was clear about those intentions they somehow, perhaps, endorsed.

In this same past week, Howard Shultz, head of Starbucks, talked about the need for morality in capitalism. Profits are important to Shultz, but so is treating customers, employees and coffee sources fairly. Ultimately, he believes, stock prices will reflect the trust in the long-term worth of the company. "The value of your company is driven by your company's values."

Maybe we in New Zealand need to smell the morning coffee.